HSA vs FSA: The Similarities and Differences

By Emily Greenhill Pierce · August 08, 2022 · 9 minute read

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HSA vs FSA: The Similarities and Differences

A health savings account (HSA) and a flexible savings account (FSA) both serve to set aside funds for qualified medical expenses and help you save money on taxes.

The main difference between an HSA vs FSA? Anyone can have an HSA as long as they are enrolled in a high-deductible health plan (HDHP). An FSA can only be offered by an employer to employees.

There are additional benefits and limitations to consider when comparing an FSA vs. HSA. Here, you’ll learn:

•   What is a health savings account (HSA)?

•   What are the pros and cons of an HSA?

•   What is a flexible spending account (FSA)?

•   What are the pros and cons of an FSA?

•   What are the differences between an HSA vs. an FSA?

•   How to choose between an HSA and an FSA?

What Is a Health Savings Account (HSA)?

There are several types of savings accounts designed to help people put away pre-tax dollars for medical expenses. But they all sound so similar, including:

•   HSAs, or health savings accounts

•   FSAs, or flexible savings accounts

•   HRAs, or health reimbursement arrangements

•   MSAs, or medical savings accounts

It’s easy to get confused.

An HSA (health savings account) enables employees and freelancers to accumulate tax-free funds to be used for current and future medical purposes, including copays, glasses, teeth cleanings, and more.

To qualify for an HSA, you must be enrolled in a high-deductible health plan (HDHP). While an HDHP often has the benefit of lower monthly premiums, you could end up paying a lot of dough out-of-pocket before meeting its high deductible. An HSA can help bridge the gap between your high deductible and out-of-pocket medical expenses.

What’s more, the funds in an HSA belong to you, travel with you when you change jobs, and can roll over year after year. They are not “use it or lose it” accounts. They may also earn interest or other earnings, which are not considered taxable interest. Another point to note: After age 65, you may use the funds for non-medical expenses, though the money withdrawn will be taxable in that situation.

Recommended: How Does a Medical Savings Account Work?

2022 HSA Contribution Limits

As of 2022, the maximum contribution limits for a health savings plan (HSA) is $3,650 for individuals and $7,300 for families with high-deductible health plans.

Advantages of an HSA

HSAs definitely have their upside. Saving tax-free dollars for unexpected medical costs can provide peace of mind. But there are many other benefits of using an HSA, including:

•   Covering out-of-pocket medical expenses. You can use your HSA funds for a myriad of healthcare costs, as long as they are qualified expenses approved by the IRS.

•   Family healthcare expenses. Your HSA cash can be spent on any family member’s medical cost as long as they’re on your HDHP.

•   Rollover contributions. Unused contributions don’t disappear at the end of the year. They stay in your HSA, growing and accumulating tax-free interest.

•   It’s portable. You can change jobs or careers and keep your HSA. The funds stay with you, not your employer.

•   Investments. You can choose to have your HSA money invested in specific mutual funds once you reach a minimum requirement balance.

•   Retirement funds. After the age of 65, you can use HSA funds for retirement without penalty as you please—be that medical expenses or a trip to Tahiti.
Lower your taxable income. Since HSA contributions go into your account pre-taxes, you could end up owing less to Uncle Sam.

Disadvantages of an HSA

Fair is fair: Now you should know the potential downsides of having an HSA. The cons include:

•   Penalties for non-qualified expenses. Before the age of 65, any money spent on unapproved purchases will be viewed as taxable income. The IRS can impose a hefty 20% penalty on any unqualified expenditures.

•   Account fees. HSAs may charge a low monthly service fee, typically no more than $5 per month. If your HSA participates in mutual fund investments, there may be an annual management fee.

•   Monetary fluctuations. If you choose to invest your HSA money in mutual funds, your balance can rise and fall with the market.

•   Record-keeping for your taxes. HSA contributions and expenses must be reported to the IRS. Keeping tabs on those transactions can be a pain.

Recommended: Tips for Paying Off Outstanding Debt

What Is a Flexible Savings Account (FSA)?

A flexible savings account, or FSA, is a tax-free account used to help cover out-of-pocket medical expenses. There are two big differences between a flexible spending account vs. a health savings account:

•   An FSA is available to all, not only those enrolled in an HDHP

•   FSAs are only offered through an employer’s benefit package.

Maximum contribution limits to a flexible savings account for 2022 are $2,850 per individual.

Advantages of an FSA

Like an HSA, having a flexible savings account or FSA offers many advantages, including:

•   Covering medical expenses. You can use your pre-tax funds on copays, prescriptions, over-the-counter meds, essential dental care, contact lenses, and more.

•   Contributions can come right from your paycheck. You can choose to have pre-tax contributions taken out of your earnings and deposited into your FSA account.

•   Funds are available immediately. If you enroll in an FSA on January 1st, and pledge to contribute $2,400 over the year, paying $200 a month, the $2,400 becomes available for you to use right away.

Disadvantages of an FSA

There are some cons of having an FSA vs. HSA. Ironically, a flexible spending account can be rather inflexible when it comes to certain situations.

The drawbacks of a flexible spending account can include:

•   Use it or lose it. In many cases, if you don’t use your FSA funds by the end of the year, you will forfeit the remaining balance. Some employers may allow certain amounts to be rolled over or a grace period to spend the money.

•   You leave, it stays. Typically, if you quit or change jobs, the money in your FSA stays with your employer.

Key Differences Between HSAs and FSAs

While both HSAs and FSAs offer tax-advantaged ways to pay for medical expenses, they do vary considerably. Here’s a breakdown of the primary differences in an HSA vs. FSA:

Health Savings Account (HSA) Flexible Spending Account (FSA)
HSAs are created and controlled by the employee or self-employed worker. FSAs can only be obtained through an employer’s benefits package.
Contributions go where you go, travel with you from job to job or even during times of unemployment. Contributions can only be used while a person is employed at a company.
To qualify for an HSA, you must be enrolled in a HDHP. To qualify for an FSA, the health plan provided by the employer does not have to be an HDHP.
Contribution limits are higher for an individual and family. Employers can also contribute. Lower contribution limits, but a spouse can also contribute to their own FSA if their employer offers one.
Contributions rollover over year-to-year. Some employers may allow a rollover of some unused funds, but most expire at the end of the year.
HSA funds can be used, tax-free, on qualified expenses after the age of 65. They can be used on non-qualified expenses but are then subject to income tax. FSA is a salaried benefit. After you retire, you are likely to forfeit any unused account funds.
HSA contributions can be invested into mutual funds. Money in an FSA cannot be put toward an employee’s personal investments.

How to Choose Between an FSA and HSA

The choice between an FSA and HSA may not be up to you. Many employers offer only one or the other. If you’re a freelance gig worker or make money from home and have a high-deductible health plan, you can qualify for an HSA, but not a flexible spending account.

If you were to find yourself in a position to debate an FSA vs. HSA (say, you were deciding whether to stay self-employed with an HSA or take a full-time job which offered an FSA), ask yourself:

•   Do I want an account that stays with me as I change jobs and into retirement?

•   Is enrolling in a high-deductible health plan worth it in order to have an HSA?

•   Do I want my contributions to be invested?

•   How much do I estimate spending on out-of-pocket medical expenses for myself or my family?

Recommended: Beginner’s Guide to Health Insurance

Can You Have Both an HSA and an FSA?

It is unlikely that you can contribute to both an HSA and an FSA at the same time, unless you have an HSA that is traveling with you from a past job, or your employer offers a limited-purpose FSA to cover specific costs for vision and dental. You can ask your HR representative if such an option exists.

Using HSA and FSA Funds

Typically, setting up an HSA is simple, as is activating and using an FSA. The accounts can come with a debit card and online features, so you can spend money on qualified purchases, check your balance, and contribute and transfer funds just like you’d do with a traditional checking account.

The Takeaway

FSAs and HSAs are very different vehicles, though both of them can help you use pre-tax earnings on out-of-pocket medical costs. Health savings accounts, or HSAs, are only available to those enrolled in high deductible health plans, while FSAs are only possible if your employer offers them. Whichever plan you might be eligible for, it can be wise to look into these accounts since they do offer avenues to make one’s healthcare costs more affordable and optimize your budget.

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Is HSA or FSA better?

An FSA and HSA both offer ways to set aside tax-free funds to use on qualified medical expenses. However, you usually don’t have the choice of picking one: Only people enrolled in a high-deductible health plan can open an HSA, and only people whose employers offer an FSA can start one.

Can I have both an FSA and HSA?

You can have an FSA and HSA, but you typically can’t contribute to both at the same time unless you have a limited-purpose FSA that covers specific vision and dental costs.

Can you use an HSA for dental?

You can use HSA funds for qualified dental and orthodontic expenses, including cleanings, sealants, and braces.

What can you spend FSA money on?

Qualifying FSA expenses typically include copays, deductibles, prescriptions, over-the-counter drugs, acne treatments, eye and vision care, alternative medicines, and more.

Photo credit: iStock/zimmytws

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